11 AIPLA

American Intellectual Property Law Association

Fair, Reasonable and Non-Discriminatory (FRAND) Terms

Daphne C. Lainson

Smart & Biggar

AIPLA Annual Meeting: IP Practice in Japan Committee

October 2013

22 AIPLA

The FRAND Pyramid

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Competing Interests

• Adoption of standards– Lower production costs and costs to consumers,

“shared” R&D expenses, reduced switching costs for consumers, more efficient uptake of new technologies, expanded customer base for standard compliant technologies, enhanced innovation around standards, improved product quality

• But:– Potential for abuses by SEP owners, lobbying/bias over

standard setting, reduction of competition once standard adopted

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Standard-Setting Organizations (SSOs)

• Develop and set industry standards– Voluntary membership– Different IPR obligations

• Disclosure, FRAND commitments

• Commitment to licence ≠ licence• Do not define FRAND terms• Actual licensing: negotiation outside of SSO and

as between parties– Expectation: negotiations will be in good faith

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What is FRAND?

• No single, precise definition• Fair

– Terms are not anti-competitive• Tied selling, bundling, free grant backs, exclusive

licensing/restrictive covenants on licensing to other parties

• Reasonable– Royalties do not result in uncompetitive pricing

• “Price-stacking”

• Non-discriminatory– All licensees are provided with similar terms and rates

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SEPs/FRAND Concerns

• Hold-up by SEP owner– Standard adopted and SEP owners engage in heavy

handed negotiation (e.g., demanding excessive royalties) or withhold SEP protected technology

– Impacts adoption of standard, increases cost to implementers and potentially consumers, affects other owners of SEPs for that standard

• Royalty Stacking– Single product, multiple standards and SEPs =

cumulative excessive royalties

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SEPs/FRAND Concerns

• Availability of injunctive relief– Equitable remedy: eBay Inc. v. MercExchange LLC (2006)

126 S Ct. 1837• Factors: irreparable harm, adequacy of available legal

remedies (e.g., damages), balance of hardships, public interest

• FRAND obligation = admission money will make whole?• If SEP owner has a FRAND obligation, is injunction

contrary to public interest (e.g., harms competition, added expense to consumers, harms innovation)?

– See also Statement of FTC In the Matter of Google Inc. FTC File No. 121-0120 (January 3, 2013)

• Statement released with publication of Google settlement• Seeking of injunctions, competition implications

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SEPs/FRAND Concerns

• Reverse hold-up by standard implementer– Pressure on SEP owner to negotiate unfavorable terms

• E.g., imbalance in negotiating power between small, upstream SEP owner over standard not yet adopted by SSO and implementer

• If an injunction or exclusion order is not available to a SEP owner, then this may shift the bargaining power to the implementer

• Anti-trust concerns: Broadcom v. Qualcomm 501 F.3d 297 (3d Cir. 2007)

– Patent holder’s intentional false promise to license SEP on FRAND terms and reliance by SSO on false promise when including patented technology in the standard = actionable anticompetitive conduct if SEP owner breaches promise

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Microsoft v. Motorola—Good Faith Negotiationsand Reasonable Royalties

• Microsoft claiming Motorola in breach of RAND obligations (good faith, fair dealing) to SSOs (ITU, IEEE):– Motorola offered SEPs at rates that are not RAND

• Motorola sent two offer letters for two SEP portfolios (wireless communications, video coding standards) with RAND rate in each offer = 2.25% of the price of the end product

– Motorola sought injunctive relief against Microsoft over SEPs• Proceedings in US district courts, the ITC and in

Germany

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Microsoft v. Motorola No. 10-cv-1823 (W.D. Wash., April 25, 2013)

• Earlier decisions:– RAND commitments create enforceable contracts between

Motorola and SSOs and Microsoft entitled to enforce contract as a third party beneficiary (Order dated Feb. 27, 2012)

– Motorola’s commitment to SSOs required initial offers to license be made in good faith (Oder dated June 12, 2012)

– Initial offers do not have to be on RAND terms, providing that a RAND license eventually issues (Order dated October 10, 2012)

• Good Faith Negotiations?– In order to determine whether Motorola’s offer was in good faith, a

comparison to a reasonable RAND royalty rate and a reasonable RAND royalty range (since more than one rate could be RAND) is required

– Court therefore determining what is reasonable RAND licensing rate and RAND royalty range for Motorola’s SEPs

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Motorola: Economic Guiding Principles

1. “A RAND royalty should be set at a level consistent with the SSOs goal of promoting widespread adoption of their standards.”

2. “In the context of a dispute…a proper methodology…to determine a RAND royalty should…recognize and seek to mitigate the risk of patent hold-up that RAND commitments are intended to avoid.”

3. “Likewise, a proper methodology for determining a RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer.”

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Motorola: Economic Guiding Principles

4. “…the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property.”

5. “…a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.”

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Motorola: Hypothetical, Bi-lateral Negotiation

• Hypothetical negotiation between “willing licensor-willing licensee”

• Applied modified version of Georgia-Pacific factors– Factors applied within the RAND licensing context

• E.g., Past royalties received relevant if negotiated under a RAND obligation or comparable negotiations (patent pools)

• Hypothetical negotiation would set RAND royalty rates by looking at:– Importance of the patent portfolio to the standard; and– Importance of the standard and patent portfolio to the products at

issue • Motorola analysis applied in In re Innovation IP Ventures

LLC 11-cv-09308 (N. Dist. IIl. ED, 3 October 2013)– Innovation IP Ventures sues on acquired patents with RAND

obligations and Court asked (pre-trial) to assess quantum of potential damages

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Motorola: Holding

• District Court finds:– Video coding portfolio

• RAND royalty rate: 0.555 cents per unit (All products)• RAND royalty range: 0.555-16.389 cents per unit (Windows,

Xbox)

– Wireless communication portfolio• RAND royalty rate: 3.471 cents per unit (Xbox)• RAND royalty rate: 0.8 cents per unit (All other products)• RAND royalty range: 0.8-19.5 cents per unit (Xbox)

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Motorola: Jury Verdict

• Unanimous Jury Verdict - September 4, 2013– Motorola breached contractual commitments to IEEE

and ITU• Damages incurred by Microsoft: $11,492,686

– Motorola’s conduct in seeking injunctive relief violated duty of good faith and fair dealing with respect to its contractual commitments to the IEEE and ITU

• Damages (attorneys fees and litigation costs) attributable to breach: $3,031,720

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Injunctive Relief

• Apple v. Motorola No. 1-11-cv-08540, 2012 WL 2376664 (N.D. Ill. June 22, 2012) [under appeal]– Unless implementer refuses to pay a royalty that meets the

FRAND requirement, the Court is not justified in granting injunctive relief

– By committing to license patents on FRAND terms, patentee implicitly acknowledges that a royalty is adequate compensation

• Apple v. Motorola No. 3:11-cv-00178-bbc, 2012 WL 5416941 (W.D. Wisc. October 29, 2012)– Depending on specific obligations to the SSO, a RAND

commitment may not deprive a SEP owner from seeking injunctive relief

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Injunctive Relief

• Realtek Semiconductor v. LSI Corp. No. C-12-03451 RMW, 2013 WL 2181717 (N.D. Cal., May 20, 2013)– Failure to offer a license on RAND terms before seeking an

exclusion order or injunctive relief = breach of RAND commitment

• Microsoft v. Motorola No. C10-1823JLR (W.D. Wash., August 11, 2013)– Seeking injunctive relief may be a breach of the duties of

good faith and fair dealing, if the SEP owner is under a RAND commitment

• Attorney’s fees and litigation costs as damages may be available

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Exclusion Orders

• ITC Inv. No. 337-TA-947 – Samsung successful in obtaining exclusion and cease and desist

orders as against certain Apple products under 19 U.S.C. §1337 (“s. 337”) (June 4, 2013)

• USTR disapproves ITC order (August 3, 2013)– S. 337 gives President (USTR) ability to disapprove exclusion and

cease and desist orders on policy grounds• Cites DOJ/USPTO Joint Statement of January 8, 2013 re remedies for

SEPs subject to voluntary FRAND commitments

– Public interest: exclusion orders may pressure an implementer of a standard to accept more onerous licensing terms, affecting competition and price to consumers

– In the future, ITC to: (1) thoroughly consider public interest; and (2) have a well developed factual record with specific findings on hold-up and reverse hold-up

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Concluding Remarks

• SEP Owners with FRAND obligations:– Royalty proposed in initial offer may be subject to duties

of good faith and fair dealing • Reasonableness of royalty: hypothetical, bi-lateral

negotiation

• Breach of duties: damages

– Seeking injunctions (exclusion orders) may be a breach of duties of good faith and fair dealing

• Breach of duties: Attorneys fees/litigation costs

• Implementers of standards:– Refusal to pay a RAND royalty may support injunctive

relief (exclusion orders)

2020 AIPLA

THE END

Thanks for your attention! Questions?

Daphne C. LainsonPartner

Smart & Biggar

dclainson@smart-biggar.ca